Technical FAQ – 24 April 2014

Q: With reference to section
10(1)(nB). Will the following expenditure paid by the employer on behalf of the
employee being relocated qualify for the exemption?

1.Deposit payable on
the new rental contract in new location.

2.Penalty fee payable
on the old rental contract.

A: In order for such costs to
qualify for the exemption, they would have to fall within the ambit of sec
10(1)(nB) of the Income Tax Act (No. 58 of 1962) (hereinafter referred to
as ‘the Act’), which states the following:

‘any benefit or advantage accruing to any employee
(as defined in paragraph 1 of the Seventh Schedule) by reason of
the fact that his employer (as defined in the said paragraph), has, in
consequence of the transfer of the employee from one place of employment to
another place of employment or the appointment of the employee as an employee
of the employer or the termination of the employee’s employment, borne the
expense—

(i) of transporting such employee, members of his
household and the personal goods and possessions of himself and the members of
his household from his previous place of residence to his new place of
residence; or

(ii) of such costs as the Commissioner may
allow which have been incurred by the employee in
respect of the sale of his previous residence and in settling in permanent
residential accommodation at his new place of residence ...’

(iii) of hiring residential accommodation in an
hotel or elsewhere for the employee or members of his household during the
period ending 183 days after his transfer took effect or after he took up his
appointment, as the case may be, if such residential accommodation was occupied
temporarily pending the obtaining of permanent residential
accommodation.’ (own emphasis added).

The penalty fee payable on the old rental contract
can only fall within the provisions of sec 10(1)(nB)(ii), as it was not
incurred for purposes of subparagraph (i) (transportation of the employee,
members of his/her household and their possessions) or subparagraph (iii)
(hiring of residential accommodation before obtaining ‘permanent residential
accommodation’). In sec 10(1)(nB)(ii), the legislature specifically referred to
‘... in respect of the sale of his previous residence ...’ If
one ascribes an ordinary meaning to the word ‘sale’, it would imply that the
residence should have been owned by the taxpayer and therefore not hired by
him/her. This is even more evident when one considers the wording of the Guide
for Employers in respect of Employees Tax (2015 Tax Year) which states
the following:

‘The following items are exempt from tax if the
employer reimburses the employee for the actual expenditure incurred:

Bond registration and legal
fees paid in respect of a new residence that has been purchased;

Transfer duty paid in
respect of the new residence;

Cancellation fees paid of
the cancellation of bond on the previous residence; and

Agent’s commission on sale
of previous residence.’

From the
guide’s wording (the four bullet points above) one can see that expenditure
incurred by the employee to obtain ownership in respect of the new residence
(bullet point 1 and 2 above) or to dispose of his/her ownership in the old
residence (bullet point 3 and 4 above), would qualify for the exemption.

The
deposit paid on the new rental contract may qualify for the exemption if it
qualifies as an ‘expense’. Given the fact that the deposits are normally
refundable, it is unclear whether the deposit would qualify as an expense. You
would therefore have to consider the terms of the lease contract to determine
if the deposit would qualify as an expense, in which case the deposit on the
new residence may qualify for the sec 10(1)(nB)(ii) exemption.

Conclusion

As stated
above, it would appear as if the penalty paid on the old rental contract would
not fall within the provisions of sec 10(1)(nB)(ii). The deposit might qualify
for the exemption in terms of sec 10(1)(nB)(ii), provided that it qualifies as
an ‘expense’. The taxpayer would however still be allowed to claim the other
relocation expenses provided for in sec 10(1)(nB) of the Act.

Should the
employee intend to buy a residence in his new location, then you may make use
of the provisions of sec 10(1)(nB)(iii), but this would only be available if
the property is only temporarily being hired in anticipation of buying a
permanent residence and may not be used for the first six months of hiring
accommodation (where there is no intention to buy a residence ).

2. Income tax
consequences for deposits taking the form of payments in advance

Q: My client receives deposits from customers
in order to secure stock and/or the price of stock which are imported. The
deposits have grown substantially over the last year and I am starting the
worry about the time of supply and accrued/received rules. What is the
definition of a deposit for tax purposes? Is there a generally accepted %? The
result of these huge deposits is that my customer control account has a very
high credit balance and for accounting purposes would have to be included in
liabilities. There are no contracts drawn up and seldom any correspondence
between supplier and customer. My client keeps the stock and insures the stock.
A full deposit of the refund would be made if the customer decided not to take
the stock. This hardly ever happens.

A: In giving
guidance to this question, it is assumed that the company receiving the
deposits is a ‘resident’ as defined in sec 1 of the Income Tax Act (No. 58 of
1962) (hereinafter referred to as ‘the Act’).

Income Tax Consequences

A deposit is not defined in sec 1 of the Act and one would
therefore have to consider the word within its normal grammatical meaning i.e.
by making use of a dictionary. It should be noted that ‘deposit’ can be used in
more than one sense in that it can either be used ‘to give security’ or ‘in
part payment’.

The definition of ‘gross income’ in sec 1 of the Act, states
the following:

‘in
relation to any year or period of assessment, means—

(i) in
the case of any resident, the total amount, in cash or otherwise, received by
or accrued to or in favour of such resident ...’

Therefore, without determining whether a receipt is income
or capital in nature, an amount would have to be ‘received by’ or ‘accrued to’
a person in order for it to be included in the person’s income. From SIR
v Silverglen Investments (Pty) Ltd (1969 A) the inference can be drawn
that a receipt must be included in gross income at the earlier of
its receipt or accrual. One would therefore have to determine when a deposit is
received by or accrued to the recipient in order to determine the timing of the
inclusion in gross income. This determination is fact specific and would depend
on various factors. In Geldenhuys v CIR (1947 CPD) it was held
that the words ‘received by’ means received by the taxpayer on his own behalf
and for his own benefit.

It was held in the case of CIR v Genn & Co (Pty)
Ltd 20 SATC 113 in the context of a loan (rather than a deposit) that
‘It certainly is not every obtaining of physical control over money or
money’s worth that constitutes a receipt for the purposes of these
provisions. If, for instance, money is obtained and banked by someone
as agent or trustee for another, the former
has not received it as his income.
At the same moment that the borrower is given
possession he falls under an obligation to repay. What is borrowed
does not become his, except in the sense, irrelevant for present purposes,
that if what is borrowed is consumable there is in law a change of
ownership in the actual things borrowed’. The fact that the amounts received
are recorded as a liability for accounting purposes, would suggest that your
client does not necessarily receive the amounts in the manner contemplated in
the definition of gross income.

Cases that may be useful in your determination of when
deposits (returnable deposits on containers) would have to be
included in ‘gross income’ are Brooks Lemos Ltd v CIR 14 SATC
295, Pyott Ltd v CIR (1945 AD) and Greases SA Ltd v
Commissioner for Inland Revenue 17 SATC 358. I’ll give provide you of
a brief summary of Brooks Lemos Ltd v CIR 14 SATC 295, as both
of the other two cases have similar facts.

In
this case, the taxpayer sold squashes in bottles only to licensed dealers and
not to the public. One price was charged on the bottle and its contents, of
which a portion of the price related to a deposit on the bottle. Should the
bottle be returned, the taxpayer would have refunded the deposit to the client.
The clients were however under no means obliged to return the bottles. When the
taxpayer gave discounts to its clients, no discount was given on the portion of
the price relating to the deposits. For accounting purposes, the portion of the
price relating to the contents and use of the bottle were credited to sales,
whilst the deposit part of the price was credited to a ‘bottle deposit
account’. The court subsequently held that the deposits were received by the
taxpayer for its own benefit and should therefore be included in its gross
income.

Therefore,
from the Brooks Lemos case (and the other two cases named above) it becomes
evident, that irrespective of the accounting treatment of the deposits, if it
is available to the taxpayer, to do with it as it/he/she pleases, then the
deposits would be included in gross income and may consequently be subject to
income tax. This is due to the fact that the deposits will be received by the
taxpayer for own benefit (Geldenhuys case). Although it can be argued that
in the above case law, the deposits were received as ‘security’ in order to
ensure that an item is returned and not as an ‘in part payment’ as may be the
case with your client, it nevertheless provide useful guidance with regard to the
tax treatment of deposits.

These
cases dealing with returnable containers may differ from your client's
situation in the sense that the obligation to return the deposit was
conditional and only arose when the container was returned. In the case of your
client, the client is obliged to provide either the goods or repay the deposit.
It may however be argued that similar principles should apply, as the terms of
the arrangement between your client and its customers may also indicate a
conditional obligation to return the amounts as this obligation only arises
when the client decides not to take delivery of the goods. As a result it would
in our view, similarly to the cases mentioned above, be difficult to argue that
your client has not received the amounts as no unconditional obligation exists
(these amounts could really be viewed as an early payment for the goods).
(Should your client be required to repay the amount (i.e. when the obligation
becomes unconditional at a later stage), it should be entitled to a deduction
if this view is followed).

In our view, the only other alternative would be to argue
that your client currently holds the amounts as trustee on behalf of its
customers (as was suggested in the judgment of the Pyott case). In order for
this to be the case, your client must not be the beneficial owner of the
amounts. There are no hard and fixed rules as to when this would be the case.
The facts and circumstances would have to be taken into account. This includes
the terms of agreements or memorandums of incorporation as well as the creation
of separate funds on behalf of the beneficial owner of the moneys by way of the
agreements (refer to the case of C:SARS v Cape Consumers (Pty) Ltd 61
SATC 91). Whether the returns on the amount (interest) accrue to your client or
its customers could be a further indication. It may also include keeping the
money in a separate trust account (refer Greases case). As considered in the
cases of Brookes Lemos and Greases, the mere fact that a separate general
ledger account or records are kept of these amounts is not sufficient to
evidence such a relationship. It is submitted that to a large extent, this
would depend on the arrangement between your client and its customers and
whether the customers intended to deposit the money with your client in such a
way that it should be kept separate from your client’s own funds. The fact that
there are no contracts in place between the taxpayer and its clients that sets
out the terms of these deposits may however cause some concern. You would
therefore have to consider whether enough evidence exists for such an argument
to be followed. As your client would bear the burden of proving that it
received these amounts as trustee, rather than for its own benefit (sec 102(1)
of the TAA). It is recommended that your client should consider obtaining a
legal opinion to this effect, if it wishes to follow this argument.

VAT implications

For VAT purposes, it is assumed that the taxpayer is a
‘vendor’ that supplies wholly taxable supplies. Sec 7(1)(a) of the Value-Added
Tax Act (No. 89 of 1991) (hereinafter referred to as ‘the VAT Act’), is the
charging section of VAT and states the following:

‘Subject
to the exemptions, exceptions, deductions and adjustments provided for in this
Act, there shall be levied and paid for the benefit of the National Revenue
Fund a tax, to be known as the value-added tax—

(a) on the supply by
any vendor of goods or services supplied by him on or after the commencement
date in the course or furtherance of any enterprise carried on
by him ...

calculated
at the rate of 14 per cent on the value of the supply concerned or the
importation, as the case may be.’ (own emphasis added).

Therefore,
even before we look at the definition of ‘enterprise’ and thereafter the
definition of ‘consideration’, there must first be a ‘supply’ (of goods or
services) in order for a vendor to become liable for VAT. If there is no
supply, then no output tax would have to be levied in terms of sec 7(1)(a). An
‘enterprise’ is defined in sec 1 of the VAT Act, the relevant part in your case
reading as follow:

‘... in
the case of any vendor, any enterprise or activity which is carried on
continuously or regularly by any person in the Republic or partly in the
Republic and in the course or furtherance of which goods or services are
supplied to any other person for a consideration, whether or not
for profit ...’ (own emphasis added).

In your
client’s case, it has to be determined whether these deposits would constitute
‘consideration’ as set out in the definition of ‘enterprise’. This is due to
the fact that should the deposits not qualify as ‘consideration’, it would be
excluded from your client’s ‘enterprise’ and consequently would not be subject
to VAT in terms of sec 7(1)(a) of the VAT Act. ‘Consideration’ is defined in
sec 1 of the VAT Act as follow:

‘... in relation to the supply of goods or services to
any person, includes any payment made or to be made (including any deposit on
any returnable container and tax), whether in money or otherwise, or any act or
forbearance, whether or not voluntary, in respect of, in response to, or for
the inducement of, the supply of any goods or services, whether by that person
or by any other person ... Provided that a deposit (other
than a deposit on a returnable container), whether refundable or not,
given in respect of a supply of goods or services shall not be
considered as payment made for the supply unless and until the
supplier applies the deposit as consideration for the supply
or such deposit is forfeited’.(own emphasis added).

Given the fact that your client refunds the deposits to its
clients, should the sale be cancelled or if your client cannot deliver, you
would have to determine when the deposits are applied as
consideration (you would therefore not deal with ‘forfeited deposits’). As soon
as the deposits are applied as consideration and a supply is made,
output tax would have to be levied in terms sec 7(1)(a) of the VAT Act.

It is however submitted that it is not always easy to
determine whether an amount would constitute a genuine deposit as such and one
may therefore encounter grey areas in this determination. According to Juta’s
Value-Added Tax (2010), it is ‘... stated in the current VAT 404 (Chapter 19)
that a deposit which is lodged to secure a future supply of goods and held
in trust until the time of supply is also excluded ...’
from the definition of ‘consideration’. We have however gone through the VAT
404 guide and in the current version no reference is made as to what
constitutes a deposit, with Chapter 19 being deleted.

Assuming that the deposits constitute deposits for purposes
of the definition of ‘consideration’, no output tax would have to be levied on
the deposits until the deposits are applied as ‘consideration’ for the supply
i.e. when the deposits are made available to your client to do with it as it
pleases and a supply relating to the deposit is made.

Conclusion

For income tax purposes, it would seem as if these
‘deposits’ are received by your client for its own benefit as it constitutes
part payment for goods where no unconditional obligation exists to refund the
deposits. Should this view be followed, a deduction will be available to your
client when the amounts are refunded.

The other alternative your client has is to argue that it
holds the amounts as trustee on behalf of the customers where it can be proved
that your client is not the beneficial owner of the amounts (in accordance with
the Pyott case). Sufficient evidence would however have to exist to proof this
and it is advised that your client obtains a legal opinion if it wishes to
follow this route.

For VAT purposes, deposits are excluded from the definition
of ‘consideration’ until it is, as in your client’s case, applied as such. Even
though the deposits are applied as consideration, your client would not have
any output tax liability until such time as the supply is made.

Comments...

1. Deposit payable on the new rental contract in new location.
2. Penalty fee payable on the old rental contract.
1. Deposit payable on the new rental contract in new location.
2. Penalty fee payable on the old rental contract. ... it appears as if some of your hyperlinks are not working correctly. See also the VAT FAQ posted on 16 April 2014

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